A Ryanair USA Would Face Big Headwinds

"SOMEBODY AT SOME STAGE IS GOING to do a long-haul low-cost airline. Will it be successful? I doubt it."

Those words were uttered in late 2005, not by the boss of a big global carrier anxious to protect its business, but by Michael O'Leary, Irish budget airline
Ryanair
's outspoken chief executive. The same person who last week said he's seriously considering starting a budget airline offering cut-price fares as low as $12 between Europe and the U.S.

It's true that the recently agreed "open skies" pact between the European Union and U.S. will open up transatlantic routes to new competitors, starting next April. But O'Leary faces a tough time in making "Ryanair USA" fly. Put simply, the offshoot wouldn't work as a pure low-cost carrier and would need to attract some higher-paying customers.

Ryanair, whose American depositary shares trade in New York under the symbol RYAAY, is Europe's largest budget airline, carrying more than 42 million passengers annually. Despite rising fuel costs, it has remained highly profitable as it has expanded across Europe. Its third-quarter profit jumped 30%, to &euro;47.7 million ($64.45 million), and it's expected to report a similar rise for the fiscal year ended March 31.

Ryanair generates profits by keeping its non-fuel costs extremely low, maximizing its fleet utilization and selling ancillary items, such as food onboard and travel insurance. It flies to cheaper airports -- some 60 miles outside big cities -- and turns planes around in just 25 minutes.

A trans-Atlantic sister operation would immediately face much higher cost pressures -- particularly for personnel. Safety rules dictate that air crews rest about 12 hours after a long flight, so the long-haul carrier would have to pay for its crews' hotels and transportation. Staff costs represent about 13% of Ryanair's current operating costs, much less than at long-haul carriers, such as
British Airways
(BAB), where the figure is about 29%, or Lufthansa (LHA.Germany), where it's around 25%.

What's more, the larger airplanes required couldn't be turned around within 90 minutes and would need far more fuel than the short-haul Boeing 737s Ryanair now uses.

To help offset these higher costs while still offering low economy-class fares, Ryanair USA would need a premium-class section on its planes, with seats that actually recline, unlike many on Ryanair's European jets.

Premium-class sections are key profit generators for long-haul airlines and are typically filled by executives jetting between major financial centers. Few are likely to want to go to the secondary airports, like Baltimore/Washington International, Providence or Long Island MacArthur, that O'Leary says he's eyeing.

A Ryanair USA could seriously undercut the business-class roundtrip fares offered by the likes of BA, which can cost well over 3,000 British pounds (about $5,940). But it would also face competition from premium-class-only airlines such as Silverjet and MAXjet, which offer some fares below &pound;1,000. And these carriers fly to New York's JFK.

Rather than betting on a risky trans-Atlantic venture, O'Leary would do better to expand Ryanair's presence in Europe and North Africa, on its own or through acquisitions. After all, the penetration of budget airlines in Europe is still some way behind where it is in the U.S.

ROD STONE, who is based in London, is a contributor to The Skeptic, a Dow Jones Newswires column on which this European Trader is based.

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